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A Primer to Overseas Investments

Cheshta Tater

Updated: Sep 10, 2022

Ending August on a high note, the Central Government, in consultation with the Reserve Bank of India (RBI) notified three (3) key regulations for overseas investments:

(i) Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules);

(ii) the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (OI Regulations); and

(iii) the Foreign Exchange Management (Overseas Investment) Directions, 2022 (OI Directions)


Collectively, the frameworks are referred to as the OI Guidelines.


The OI Regulations aim to simplify the regulatory processes involved in overseas investment, allowing Indian enterprises to expand globally with ease. This article highlights the most important aspects of the OI Guidelines.


First things first, what is not allowed:

  1. Indian entities cannot invest in foreign entities engaged in:

  2. Real estate activities;

  3. Gambling of any kind or form;

  4. Financial products linked with the Indian Rupee (unless specifically permitted by the RBI)

  5. Indian entities cannot use borrowed funds to invest overseas.

  6. If any such investment leads to two layers of subsidiaries, the investment is not permitted.

  7. Investments in Pakistan are prohibited unless approval is obtained from the Central Government. Further, investments in Nepal and Bhutan are only permitted via freely convertible currencies.


Now, let’s understand the new definitions.

The OI Guidelines demarcate two kinds of investments: Overseas Direct Investments (ODI) and Overseas Portfolio Investments (OPI).

Overseas Direct Investment

Overseas Portfolio Investments

Such an investment can happen by one of the following four ways:

(i) acquisition of unlisted equity capital of a foreign entity;

(ii) subscription as a part of the memorandum of association of a foreign entity;

(iii) investment in 10% or more of the paid-up equity capital of a listed foreign entity; or

(iv) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.


Such investments are those other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.


Such an investment in foreign securities does not include investments in any unlisted debt instruments or in any security issued by a person resident in India who is not in an IFSC.

The financial commitment of an Indian entity under ODI is capped at 400% of such Indian entity’s net worth as on the date of the last audited balance sheet.

​Investments as OPI by an Indian entity cannot exceed 50% of its net worth as on the date of its last audited balance sheet.

​No OI investment is both ODI and OPI.

The next addition to the Regulations has been the term ‘foreign entity’. A foreign entity is any body corporate formed or registered outside the territory of India. This term replaces the terms ‘joint venture’ and ‘wholly owned subsidiary’ in the OI Regulations. So far, Indian entities were investing overseas by entering into joint venture agreements or through creating a wholly owned subsidiary. Recognising investments in foreign entities gives way to ease of business and more opportunities for Indian entities to invest overseas.


Another important addition is the definition of ‘control’. Mere 10% of voting rights is sufficient to establish control over an entity. The concept of control determines the eligibility to invest in debt instruments and for identifying subsidiaries and step down subsidiaries of a listed foreign entity.


The financial services sector is discussed in several parts of the OI Regulations and has been defined to include any prime business activity that, if conducted in India, would require registration with or be regulated by a financial sector regulator in India.



The new regime is being praised for facilitating ease of business. How does it provide the same?


The speculated impact of these regulations match the intention behind their enforcement — providing clarity, streamlining processes, liberalising overseas investment — all in all, facilitating ease of business.


In Part II of the OI Series, we shall discuss the reforms brought along, including the dispensation of RBI approvals for deferred payment of consideration, as well as for disinvestment, and liberalisation of investments in entities engaged in financial services activities.


Please note that nothing in this article consttutes legal advice.


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